Bank is now the main option
POOR risks and returns in unsecured merchant lending and cashflow schemes have led to the withdrawal of some important sources of finance for milk quota.
Much of the business is now being conducted direct with the banks, say consultants.
At the same time banks have become more careful, commonly charging 2-2.5% over base rate for overdrafts compared with 1.5-2% a year ago, says Mike Greetham of Andersons Melton Mowbray office.
In the case of new finance schemes which replace those withdrawn, and existing schemes which still fund quota leasing or purchase, terms are tighter and the cost relatively high to reflect the risk.
"For those looking to buy quota, a five-year loan from their existing bank would probably be the first option," suggests Mr Greetham. "The banks are generally cheaper than other sources if you have a good relationship."
But with the industry in its present state, Mr Greetham says that producers should take a less conventional approach to finance, looking for ways to raise cash from within the business rather than automatically looking to borrow.
For example, could cows be sold to raise the money for more quota? This has the advantage of raising cash as well as reducing the need for quota.
"It may be easier to raise cash by selling machinery, using the sale proceeds to finance the quota then hiring or taking finance on a replacement machine if one is needed.
"The machinery sector is desperate to sell at the moment, and there are some very keen finance terms, but make sure you really need the new machine if this is the route you are considering."
A further option is to look at used quota which can be very good value for money, says Mr Greetham.
At Hamiltons quota department in Gloucester, manager Jim Leamon confirms that while this is not new, it is a route which many are currently taking.
"If the business is flexible enough to consider buying this year, used quota is well worth looking at with 4% currently trading at around 24.5p/litre. At this level, an annual cost (before interest charges), equating to 4.9p/litre over five years unsecured or 3.5p/litre on a secured loan over 7 years certainly warrants consideration," he says.
This could then be complemented by leasing in the current year. The key benefit is that, assuming the business is profitable, it is able to take advantage of the tax efficiency of leasing.
However, the timing and pricing do not always coincide to make a combination such as this practical.
"Looking at key factors currently influencing this quota year, if this option is being considered, it is perhaps worth appreciating that if national production continues to be strong, it is quite possible that after the New Year many producers will be looking to sell used to help provide funds to purchase clean quota.
"With a strong supply, better value used could be available in Feb-ruary/March next year. If this does not prove to be the case, potential purchasers can still carry the option forward of purchasing clean quota in the following quota year." *